Managed Futures (CTA)

“Managed Futures” is the name given to the category of actively managed investment strategies that gain price exposure to assets via the use of futures contracts. They are commonly market-neutral in nature, and marketed highlighting their potential to produce outsized returns during periods of negative performance in equity markets.

Managed futures strategies are usually structured as investment funds, or run as separate managed accounts (SMA). Their access is usually restricted to qualified investors due to their complex nature, use of leverage and routinely large minimum investment requirements.
Managed futures have become synonymous with CTA funds (Commodity trading advisors) due to many strategies in the infancy of the space focusing on commodities futures. In that sense, some CTAs may be managed futures strategies, but not all managed futures will be CTAs.

There is a large body of academic work that shows that, when included in a traditional portfolio, managed futures strategies are one of the few asset classes that have demonstrably reduced the risk of traditional equity portfolios. Managed futures usually follow a “trend following” strategy and aim to produce market neutral or absolute returns.

Mr. Client has an existing equity portfolio but feels like he isn’t getting anywhere given that the portfolio tanks whenever the market does, giving back any gains that he might have accumulated during positive periods. With the help of his wealth manager he shops for managed futures strategies, ultimately arriving at a shortlist of 4 attractive funds. After creating a correlation matrix of all of the contender funds relative to Mr. Clients portfolio, the advisor determines that the ABC Global Long Short Fund provides optimal diversification effects for Mr. Clients portfolio. The fund exhibits the highest degree of negative correlation to Mr. Clients portfolio and has an exceptionally high Sortino Ratio- indicating to the adviser that the fund compensates investors very well for the risks being taken with their capital.